Shipping during COVID-19: why the freight rates have surged unprecedentedly?

When the Evergreen megaship blocked traffic in the Suez Canal for almost a week in March, it triggered a new surge in container spot freight rates, which had finally started to settle from the all-time highs reached during the COVID-19 pandemic.

Shipping rates are a major component of international trade costs. Almost all manufactured goods–including clothes, medicines and processed food products–are shipped in containers. And the ripples will hit most consumers now that any businesses won’t be able to bear the brunt of the higher rates and will pass them on to their customers.


Unprecedented shortage
Contrary to expectations, demand for container shipping has grown during the pandemic, bouncing back quickly from an initial slowdown.

“Changes in consumption and shopping patterns triggered by the pandemic, including a surge in electronic commerce, as well as lockdown measures, have in fact led to increased import demand for manufactured consumer goods, a large part of which is moved in shipping containers. The increase in demand was stronger than expected and not met with a sufficient supply of shipping capacity. Empty boxes were left in places where they were not needed, and repositioning had not been planned for.” explains the UNCTAD (United Nations Conference on Trade and Development).

On the other hand, the pandemic has caused major imbalances in international trade, since restrictions in many countries have impacted their production, making them dependent on imports from China. Likewise, ports have also slowed down shipments and landings due to lack of personnel, resulting in congestion, so that services are delayed even in the most important shipping companies.

Maritime trade flows further increased as some governments eased lockdowns and approved national stimulus packages, and businesses stocked up in anticipation of new waves of the pandemic. 

The underlying causes are complex and include changing trade patterns and imbalances, capacity management by carriers at the beginning of the crisis and ongoing COVID-19-related delays in transport connection points, such as ports.

Rates to developing regions skyrocket
The impact on freight rates has been greatest on trade routes to developing regions, where consumers and businesses can least afford it.

Currently, rates to South America and western Africa are higher than to any other major trade region. By early 2021, for example, freight rates from China to South America had jumped 443% compared with 63% on the route between Asia and North America’s eastern coast.

Part of the explanation lies in the fact that routes from China to countries in South America and Africa are often longer. More ships are required for weekly service on these routes, meaning many containers are also “stuck” on these routes.

“When empty containers are scarce, an importer in Brazil or Nigeria must pay not only for the transport of the full import container but also for the inventory holding cost of the empty container.” says UNCTAD.

Another factor is the lack of return cargo. South American and western African nations import more manufactured goods than they export, and it’s costly for carriers to return empty boxes to China on long routes.

The consequences of this shipping situation are already wreaking havoc on the profitability of the companies, even leading some of them to close down, preferring to lose or divert their cargoes.  In addition, waiting for ships at the ports represents a security risk.

In this scenario, Latin American importers are more affected by the increase in maritime freight rates, which is why it is necessary to have a logistics services company to simplify the processes.